Shale Energy Bubble Threatens Second Economic Collapse

Shale oil production vs. Time (2005-2025)
Shale oil production vs. Time (2005-2025)

There has been more than a little celebration as the result of the huge shale gas deposits discovered in Pennsylvania and elsewhere. The discovery has led to a sense among many that our energy problems are not terribly urgent. Even President Obama referred to a 100 year supply of natural gas in his second State of the Union address. The U.S. is now predicted to become the world’s top oil and gas producer in the year 2017. What those predictions don’t tell is how long the U.S. is expected to remain in that position.

According to one expert, that status could be very short-lived indeed. In fact, according to David Hughes, a scientist who spent 32 years with the Geological Survey of Canada, the exceedingly optimistic estimates could be setting us up for a fall, the likes of which we have not seen since the real estate collapse of 2008. Hughes is currently a fellow with the Post Carbon Institute.

Shale gas has grown explosively to the point that it now supplies some 40 percent of U.S. natural gas. But the question is, how long can that explosion last?

Hughes has noted in his report, Drill Baby Drill that it’s not the amount of gas in situ, but the achievable rate of supply that really matters. It turns out, there are significant constraints to achieving the needed rates for both shale gas and oil. After studying production data for some 65,000 shale gas wells, using the industry standard DI Desktop /HPDI database, Hughes found that the vast majority of these wells are depleted within five years.

So although, there is a huge amount of gas and oil sitting there, it will become increasingly difficult, risky and expensive to retrieve those resources as time goes on. The very high rates of decline of these wells will require thousands of new wells to be dug at a cost that could well exceed the value of the energy extracted. In the case of shale gas, Hughes estimates a cost of $42 billion per year as compared to $32.5 billion worth of gas that was produced in 2012.

A similar scenario exists with the shale (tight) oil, The two main plays in North Dakota (Bakken/yellow) and Texas (Eagle Ford/brown) are declining rapidly and will require over 1500 new wells annually at a cost of $14 billion, just to offset the declines. Production of this oil is expected to peak in 2017 (the year the US briefly becomes top producer) dropping back within two years to 2012 levels and essentially petering out by 2025. In other words, this whole shale oil bonanza will be a bubble of about ten years’ duration (see graph).

Tar sands oil, the raison d’être for the much-opposed Keystone XL pipeline, is likewise troubled. It contains relatively low energy while requiring lots of energy, in the form of steam, to produce. Some estimates claim a cost of as much as $100 per barrel.

It is not just Hughes saying this. The Energy Information Administration (EIA) sees U.S. domestic crude oil production including shale oil peaking at 7.5 million barrels per day (mbd) in 2019 (well below the all-time U.S. peak of 9.6 mbd in 1970), and by 2040 the share of domestically produced crude oil is projected to be lower than it is today.

At the same time as Hughes’ report came out, Deborah Rogers of the Energy Policy Forum also issued her report, Shale and Wall Street: Was the Decline in Natural Gas Prices Orchestrated?. Rogers is a former investment banker, now the founder of the Energy Policy Forum. According to her report, shale mergers and acquisitions became one of the most profitable areas for Wall St. investment banks, accounting for some $46.5 billion worth of deals. Her report provides evidence that Wall Street promoted the natural gas drilling frenzy (much as it did the housing bubble), by, among other things, conspiring with energy companies to overstate the size of reserves by as much as 4-500% , as well as understating the steep decline rates and highly inefficient nature of these operations. Furthermore, they drove production to unsustainable levels in an effort to drive prices down to encourage investment and manipulate government policy in a direction most favorable to domestic oil and gas production. Because of the debt resulting from these highly leveraged operations, stated reserves may have broken SEC rules in an effort to avoid collateral default.

So, it seems what we have here is a conspiracy of misinformation, on the part of energy companies and their Wall Street backers, intended, in the name of short term profit, to lure our economy out onto a branch of the energy tree that is not strong enough to hold its weight.

When that branch collapses, prices will suddenly go through the roof, and the result will be much the same as the financial collapse of 2008, only this time the government will be asked to bail out the oil companies.

I think it would be appropriate, given this information, to immediately terminate the Keystone XL pipeline and to initiate criminal prosecution of all those involved, for their attempt to defraud the American public, and to, once again put the entire world economy at risk.

And, it’s time for this game to get some rules, so this doesn’t keep happening.

[Image courtesy of Post Carbon Institute]


RP Siegel, PE, is an inventor, consultant and author. He co-wrote the eco-thriller Vapor Trails, the first in a series covering the human side of various sustainability issues including energy, food, and water in an exciting and entertaining format. Now available on Kindle.

Follow RP Siegel on Twitter.

RP Siegel

RP Siegel, author and inventor, shines a powerful light on numerous environmental and technological topics. His work has appeared in Triple Pundit, GreenBiz, Justmeans, CSRWire, Sustainable Brands, PolicyInnovations, Social Earth, 3BL Media, ThomasNet, Huffington Post, Strategy+Business, Mechanical Engineering, and among others . He is the co-author, with Roger Saillant, of Vapor Trails, an adventure novel that shows climate change from a human perspective. RP is a professional engineer - a prolific inventor with 52 patents and President of Rain Mountain LLC a an independent product development group. RP recently returned from Abu Dhabi where he traveled as the winner of the 2015 Sustainability Week blogging competition.Contact:

18 responses

  1. There is an inherent contradiction in the argument: “prices will suddenly go through the roof” and “the government will be asked to bail out the oil companies.” If the prices of petroleum and natural gas go “through the roof” then the producers will be rich, and won’t need any bailing out. Even if the Bakken and Eagle Ford fields decline rapidly, other fields are being put into production, and higher petroleum/natural gas prices will stimulate new drilling.

    1. It’s only a contradiction if you don’t understand the difference between prices and profits. The point is, if it costs more to get the oil out than the oil is worth, the companies won’t drill it unless the prices go up. If the price of gas shoots up to $10/gal, that will wreck the US economy. So the oil companies will then go to the government saying, “if you don’t help us pay for these thousands of new wells, we will have no choice but to raise prices that high.”

  2. RP Seigel is holding himself out to be a Professional Engineer. I have been unable to find what State he obtained his registration in. The only property Rain Mountain, LLC owns is in Montana, and the Montana PE licensing board website does not show that either RP Seigel, or Rain Mountain, LLC as being licensed to practice Engineering in the State.
    I believe this guy to be a fraud!

    1. If you don’t like the message, attack the messenger. It works for Rush Limbaugh, why not you, too? I can assure you that my credentials are legitimate. But if you still don’t believe me, how about a little wager on it, say $10,000?

  3. It would seem the sky will be falling. Well, perhaps. Let us keep in mind, however that a few short years ago shale oil and gas were only dreams in the minds of energy experts. Since then we have learned to recover these resources. It is not beyond belief that better, more efficient ways of recovering these will come online. Meanwhile (aye, here’s the rub) if the premise of the article is correct we had better throw our R&D dollars into renewables.

    Now where have I heard that before? Well follow the money.


    1. If we only look at up front cost we are doomed to put unmeasured back end cost upon the citizenry.

      Do we really want to increase investment in infrastructure that burns finite supplies of fossil fuels, fuel that pollutes the air after polluting the ground and land it was recovered from?

  4. Very interesting article. The intention “that the vast majority of these
    wells are depleted within five years” should be told all around the
    world. In Germany the debate is not that euphoric, but a lot of
    politicians really think that shale gas is a serious energy option in
    the future. But right now germany is discussing about a 3 year long
    lasting moratorium
    where all the pros and cons are evaluated. During this moratorium no
    decisions concerning shale gas should be made. Maybe also a solution for
    other countries?

  5. I find the referenced reports and story interesting and very plausible. I would say the parallels are closer to the tech wreck telecom/internet bubble of 2000 than the real estate bubble of 2008. That doesn’t mean in this fragile economy the collateral damage won’t be acutely felt, just that the shale/tar gas/oil bubble is just not as large as the real estate bubble.

    I think the most confusing thing to people in the above narrative is that natural gas prices will rise when this bubble is pricked because it seems counter-intuitive. When the telecom bubble burst bandwidth prices dropped dramatically because of the over-build in long haul networks. Carriers facing impending bankruptcy would lower their price per unit of bandwidth on a STM-1 or OC-48 to win near term revenue which would temporarily cover their costs and, ultimately keep them out of chapter 11. Other carriers would follow suit to hold market share. This led to a downward price spiral. In the end, the price declines were too great and doom followed.

    Nearly all long haul providers filed for chapter 11 or were purchased by more healthy players. Qwest, Global Crossing, MCI/Worldcom, ICG, Covad, Broadview, etc. all filed for chapter 11. Level 3 survived but with a massive $10b debt load. AT&T was purchased by SBC (who later kept the ATT name simply because of its strong brand recognition). Equipment vendors Lucent, Alcatel, Nokia, Siemens and others all
    suffered from the billions in equipment financing deals they provided to
    these carriers. Ultimately, 10s of Billions in debt were wiped out and hundreds of billions in equity evaporated.

    The funny thing about the telecom story is that bandwidth prices didn’t go up primarily because billions in debt were eliminated through the bankruptcy process. But the telecom investment story is very different from natural gas. Telecom networks are built by digging up streets/highways or using other rights of way, putting ducts in trenches and pulling or blowing fiber through those ducts. Once that investment is made carriers then sell capacity or services (utilizing that capacity) to other carriers and/or enterprise customers.

    Eliminating billions in debt service simply made it cheaper for telecom carriers to provide services. Natural gas capital investment, on the other hand, is very different. You can eliminate debt by filing for chapter 11, but if the gas well “decline rates” are very hight then more and more drilling is required and the cost of extraction continues to mount and natural gas prices must rise to reflect that cost.

    I don’t know how this will play out, but my gut instinct tells me natural gas prices will stay low until we start seeing some chapter 11 filings. Then when the dust settles, it’s likely natural gas prices will rise significantly. Ultimately, where they settle will be a function of true well decline rates and the associated costs of drilling.

    Whatever the end, it’s going to be a bumpy ride, so strap yourself in.

    1. Interesting point. So maybe it will be the third collapse. Meanwhile the temporarily low natural gas prices are driving utilities to invest in gas-powered plants and steering investors away from renewables. Truck fleets are also contemplating conversion to natural gas power. This increasing dependency on gas will increase the damage suffered when the bubble bursts, raising costs across many sectors of the economy, driving ever more layoffs, while Wall Street bankers contemplate their next target.

  6. No doubt one can find at least a handful of appropriately credentialed people who will state that climate change is fiction and that vaccines give children autism. Consider at least making an effort to understand why the viewpoints of David Hughes et. al. are outside the consensus.

  7. Good article. I agree with most of the points, but I’m not so sure this is a disaster (except maybe for the boom and bust in North Dakota). There is a heck of a lot going on in renewables right now that, regardless of cheap gas, is growing and growing and growing.

    Natural gas is a bridge to better things. I say we should take advantage of this boom while it lasts. Smart people see it as a bridge, and will prepare accordingly.

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